Dennis Norman
Over the past few days I have heard stories of people that have lost their homes through foreclosure and then, as if that was not enough, were told by their tax preparer that they owed thousands of dollars in taxes for “forgiven debt”.
As bad as this sounds it is reality…or at least was reality. Let me give a quick example….You bought a home for $150,000 back in 2000….during the boom it’s value shot up to $300,000…..you need money for the kids college so you refinanced and borrowed $240,000 on your home, or $90,000 more than you actually had “in” it. Unforutnately a few months later you lose your job, can’t make the payments and the lender forecloses on your house. At this time you would normally be olbigated to pay income tax on the $90,000 you borrowed in excess of your cost.
Talk about a double whammy….first you lose your house, then you get a huge tax bill from the IRS….ugh..
Fortunately this is not the case today. Thanks to the Mortgage Forgiveness Debt Relief Act of 2007, assuming you meet the qualifications, if you lose your home to foreclosure you won’t be facing the big tax bill from Uncle Sam.
In the stories I heard the persons tax preparer was not aware of this and therefore included the income reported on the 1099 from the lender for forgiven debt as income. Fortunately all that is necessary to receive relief from this act is to file an IRS form 982
If you lost a home to foreclosure in the past two years I would suggest you ask your tax preparer about the Mortgage Forgiveness Debt Relief Act of 2007 and make sure you ahve not paid taxes on debt forgiveness that you should not have.
The IRS has a publication that explains this in great detail if you would like to learn more click here.
Related Posts
- Will you owe taxes on a short-sale or foreclosure?
- California REALTORS Push Legislation To Extend Anti-Deficiency Protection for Homeowners
- Relief Available For Homeowners with Drywall Issues or Affected by Gulf Oil Spill
- What to do when you owe more than your home is worth
- Mortgage Programs Fall Short in Keeping Homeowners out of Foreclosure
[...] typically marches to the beat of it’s own drum, as I discovered last year when I did a post on the Mortgage Forgiveness Act only to find out that the State of California was not following suit, as most states were, and [...]
[...] typically marches to the beat of it’s own drum, as I discovered last year when I did a post on the Mortgage Forgiveness Act only to find out that the State of California was not following suit, as most states were, and [...]
Does anyone know if Turbo Tax is updated yet for California?
SB 401 was signed so the 1099-C should be a non-issue, but it needs to be updated on the software.
TT News on the subject:
http://turbotax.intuit.com/support/kb/state-taxes/state-issues/8216.html
Looks like it is official!! Hopefully turbo-tax will recognize it soon. http://www.sfgate.com/cgi-bin/blogs/nov05election/detail?entry_id=61145
FYI…
The Franchise Tax Board says: “Once the governor signs this into law, California taxpayers will not have to do anything. If they qualify for federal relief on the mortgage debt forgiven, then they will also qualify for state income tax purposes. California Form 540 starts with federal adjusted gross income so there will be no adjustment necessary to properly reflect the state adjusted gross income amount for this issue.”
When will it be signed?
Nice work!
Hopefully Turbo tax will recognize this by this weekend so I can finish my taxes up!! http://www.latimes.com/news/local/la-me-tax-break9-2010apr09,0,6317895.story?track=rss
YIPEEEE!!! SB 401 was passed today and the Govenor is expected to sign it this time
http://www.dsnews.com/articles/california-legislature-pushes-important-foreclosure-bill-forward-2010-04-08
http://www.sacbee.com/2010/04/06/2657410/california-expected-to-cancel.html
Does anybody know what organization rule GMAC? I think OTC and/or the OC doesn’t cover GMAC. Thanks in advance if anybody help.
Just found out. GMAC Mortgages is licensed and handled by California Department of Corporates. Its number is 1.866.275.2677, url http://www.corp.ca.gov. For complain it needs to be created via the url “http://www.corp.ca.gov/about/complaint.asp”
I have been reading these post for a while now and would like to make just a few comments that people should be aware of if they are not already.
1. For non-recourse loans that have canceled debt, this canceled debt is treated as amount realized and NOT ORDINARY INCOME. You do not report this as income and therefore should not be taxed on the canceled debt. Of course, there may be exceptions but this is how it is described in IRS publication 4681. To my understanding investor properties are not eligible for non-recourse status and I think this is for the reason that it is not their personal residence and would not be a loss of their place to live.
2. If the lender sends incorrect 1099A and 1099C forms (and from my experience that is all they have sent out), it is not worth the time and effort to try and have them send correct revisions of these forms. You can file with an explanation that the forms were sent with incorrectly reported information and describe why the canceled debt is not cancellation of indebtedness income (COD income), this may be a foreclosure on a non-recourse loan situation.
3. I suggest consulting either a CPA or tax attorney before filing and even spend a few extra dollars to have them write up the reasoning with your facts, the law and an analysis as to why you are not reporting the COD income that is most likely reported incorrectly by the lender.
4. Filing extensions both Federal and California (not sure about other states): A: IF YOU WILL OWE ANY MONEY TO EITHER FEDERAL OR CALIFORNIA, YOU CANNOT PAY LATER THAN APRIL 15th. DO YOUR TAXES BEFOREHAND TO MAKE SURE AND IF YOU OWE AND CANNOT PAY BY APRIL 15th, SET UP PAYMENT ARRANGEMENTS TO DO SO WITH BOTH FEDERAL IRS AND CALIFORNIA. B: You can file the actual tax form documents after April 15th but must be mailed before Oct 15th. C: There is really no such thing as “Filing an Extension” on your taxes, this only applies to the filing of the tax documents.
5. If you end up reporting 1099A and 1099C amounts from the lender as income (either inadvertently or conservatively) and the forms are found later to be incorrect, you should be refunded that taxable amount paid for that COD income.
California is in a financial crisis and is in my opinion needs any money it can get, it will collect all the income it can get now and figure it out later. Some people who lost their homes through foreclosure will never know the difference if they never do any research or consult a tax professional.
6. There are exceptions to reporting COD income (if it indeed is income). One is Insolvency, if at the time of foreclosure your liabilities outweigh your assets then you may be able to claim insolvency which means there is no taxable COD income from the foreclosure.
7. People seem to not be aware that Short sales, Foreclosures and Loan Modification all have a potential for tax consequences.
8. As of March 19th, 2009 the California bill to extend the law to 2009 still has not been signed into law. I doubt that it will be done before April 15, 2009.
I think that is enough for now. My story short version: I signed a VERY BAD HOME LOAN in January 2006 and was told I could refi in a couple months so just sign and worry about it later. Worry I did for three years. I am not an attorney or CPA, I am just a California resident who lost her home through foreclosure in 2009 after fighting America’s Servicing Company (a subsidiary of Wells Fargo (WF)) for years. I was not laid off and in fact always had an income but WF was not interested in working together on terms that would work for both parties. My property lost close to 60% of market value in the first two years. I had two short sales with qualified buyers pending and WF rejected both. WF went straight to foreclosure. I went to the non-judicial foreclosure of my home which took place on the San Diego Courthouse steps. There were only investors, an auctioneer and myself present. I made friends with the auctioneer, he was getting messages from WF not to sell my property to anyone under a certain amount and that WF had an investor there that would be bidding at that price. At the same time the auctioneer was in contact with WF, I also received a phone call from a different WF representative that they were interested in now doing a loan modification. I was sitting next to the auctioneer at the courthouse minutes before the foreclosure. My home was bought by that investor on those steps that morning. I fought a long tough fight with a company that was unwilling to let a person with income willing to pay a single digit interest rate and Wells Fargo refused. I received two 1099A forms and two 1099C forms, all incorrectly reported. I did consult a tax attorney, it was worth the money to have him fill out my taxes, draft the potential audit letters, do an insolvency analysis. I not only am not paying taxes, I am getting a refund. His fees are well within the refund, which means all gain and no loss on my taxes for the toxic loan I was suckered into. I have justification for my tax preparation and I am now DONE with Wells Fargo antics!
The banks are reporting the majority of non-recourse loans as COD income for their tax purposes. Do not let the banks get any more perks and do not let them take any more from you!
California is a non-recourse state. This means that the debt (not the loan) is non-recourse if the previously mentioned reasons apply (original/purchase loan, primary residence). I’m not sure where you stand as in a previous post you mentioned you modified your loan. Best of luck.
I just spoke to GMAC and took a look at the IRS instructions for 1099-C. Here’s the instructions for 1099-c Box #5:
“Box 5. WAS BORROWER PERSONALLY LIABLE FOR REPAYMENT OF DEBT
Enter an “X” in the applicable box to indicate whether the borrower was personally liable for repayment of the debt at the time the debt was created or, if modified, at the time of the last modification.”
My interpretation as well as the interpretation of GMAC (and probably all of the other banks) is that the borrower IS personally liable. When you sign your loan docs, you are liable to pay your mortgage. Unfortunately, if this bill doesn’t get passed in the state of CA and you don’t pay the tax due on that amount, you face the risk of being audited.
I plan on filing an extension to buy some time to wait for this bill to get passed. Fingers are crossed!
Extension seems to be automati according to FTB “http://www.ftb.ca.gov/individuals/faq/ivr/201.shtml
” if you don’t owe state tax. Tip got from “http://www.facebook.com/album.php?profile=1&id=451897945530#!/pages/The-Peoples-Page-1099-C/451897945530″
Oh, and to add insult to injury, in making my calls to Wells Fargo, after more than a year they state that there is a $15 inspection fee that is still showing up as a balance on the account. I was totally unaware of this and was never contacted. I asked the Customer Service dept, Foreclosure dept, Manager Resolutions dept, and each person I spoke to said that they were unable to waive the fee when I suggested the possibility. The initial Customer Service rep who I talked to said that the fee was for someone to “check on the place”. They said that it could mean physically entering the place, driving next to it, or driving close to the general vicinity of it. Pretty vague. I asked when this inspection was made as I was unaware of it. I will be including this in my fax to them, asking for the $15 to be waived. You guessed it, they referred me to the same fax number as previously mentioned!
Quick update for former Wells Fargo Home Mortgage customers:
It looks like they are routing all calls relating to 1099-C and 1099-A forms to their “Manager Resolution Dept” (a.k.a. “Mortgage Servicing Dept”, although this has also been a moniker for the Collections Dept). Upon getting transferred to or calling the Mgr Resoltn Dept at 866-932-1656, select option 2 (1099 forms). What the rep will then likely tell you in some form or another is that 1099-C (and 1099-A) forms are being sent in “default” fashion with question 5 marked “No”! They will do nothing over the phone to help you resolve it there and then. You have to send a fax to 866-453-6315. Depending on your “specific circumstances and the state that you live in”, they will review the facts and send revised 1099 forms if warranted. I don’t understand why the bureaucracy as they should be able to tell from their databases whether the loan was the original one or not and whether the foreclosed home was used as a principal residence or not. And does it matter which state I’m in? Just send the right 1099 forms to begin with! Anyway, I am going to send the fax in and without delay also contact the California Bankers Association.
Also, in my case, I will be filling in the insolvency worksheet of IRS Publication 4681. Even if the fact that I was sent the wrong 1099 forms is proved moot as a result of proving insolvency, I am determined to in fact receive the correct forms!
if your 1099-c is marked as NO…THAT IS WHAT YOU WANT.
NO is good and you will owe nothing.
it is when it is marked yes that you will have problems!!!!
I meant to say that the forms I received were both marked “Yes”.
Thanks to all those whose hard work in contacting banks, the IRS, tax advisors, etc., and posting it on this board have helped and informed people like me.
Here’s my story.
- Laid off in late 2005.
- Mid-2006, called bank BEFORE I had a late payment, telling them that I was projected to have problems paying mortgage a couple of months down the line but they wouldn’t help me unless I was at least one month late with payment. Separated from my wife on top of that.
-Paid all of the house-related bills on time (by myself) but got into a deeper hole.
-It’s just stressful to talk to banks. Dealing with them has been a living nightmare. I held on as long as I could, until mid-2008 when all attempts to modify the loan and talks with the bank failed to save the place.
-Tried a short sale and had two buyers lined up – the bank was naturally, constantly informed about these potential buyers (as required in the process, as the potential sale goes through them). The result: THE BANK FORECLOSED! Non-recourse meant that their administrative error (the original foreclosure sale date in their system was gone ahead with) could not be reversed (CA is a non-recourse state in terms of foreclosures).
-What’s worse is that I had read about these types of horror stories and informed my realtor to adamantly have the banks acknowledge well ahead of time that the original foreclosure sale date would be postponed pending the short sale! Banks that have potential buyers should do ANYTHING to ensure that that avenue is exhausted before proceeding with foreclosure.
- Wells Fargo are absolute incompetents, departments in different states that don’t communicate VITAL information to each other, reps that are poorly trained, calls that get transferred, having to resupply the same 15 bits of information just to talk to an incompetent, phone systems that recognize your phone number and send you directly to collections rather than someone who could help. Sound familiar?
-Worst of all, the actual sheriff’s sale/foreclosure was on 01/09/09. (Laid off the day before, by the way)! If the bank had put me out of my misery 10 days earlier (or if I was less honorable and stopped making payments a month earlier), it would’ve made things simpler as things currently stand with California’s decision not to conform to the Federal Mortgage Debt Forgiveness Act (as in $7k in potential CA tax simpler).
-”Luckily” I was insolvent (the day before foreclosure).
-The bank has lost about $150 k as a result of this foreclosure and could’ve minimized their losses (as well as mine, not that this was in a concern of theirs) had the short sale gone through unhindered.
I’ll see how things pan out as I’m about to submit my 2009 taxes. I have nothing left financially but high in spirit and I’m starting to recover after finally finding work nine months after the relatively recent layoff. Thanks for listening/reading – that’s the context! I’m sure many of you have similar stories.
Now, regarding 1099-A and 1099-C horror story:
If the bank that foreclosed on the home (Wells Fargo – the absolute worst in customer service) does not finally send a corrected 1099-C, I will file a note with the IRS stating everyone and anyone at the bank that I’ve talked to and why from their perspective they feel they are right in sending the 1099-C. I will try yet again all of next week and elevate it to the California Banker’s Association option.
My home was the only one I had. It was my principal residence and the original loan. Either way, I’m not paying the $7k to CA. I can’t afford a penny as I don’t have a penny to my name. Worst case scenario I’ll make $25 a month payments to the FTB.
Best case scenario I pay nothing as a result of being insolvent. What irks me is the absolutely unnecessary torture that lenders are putting former homeowners through. Unfortunately I have some underlying (genetic) health problems that have been exacerbated and flared up as a result of stress. They’re under control but only because I am strong, fit, and never give up. Especially not some clueless chump behind a desk that doesn’t know their head from his behind.
Banks did not deserve a bailout. Let them sink next time and hold executives directly accountable (i.e., no golden parachute).
This was a bit of a rant but I also wanted to include a bit of a human element that bank incompetency causes real and significant stress, almost all of which could be avoided.
Best of luck to all of you out there. Don’t give up, fight for your rights, and be strong!
Last payment on 1st and HELOC purchase money loans 9/1/08. Home foreclosed 5/1/09 after trying to work something out with WF(they held both loans). We had not refinanced either loan nor drawn down on the HELOC. We were not responsible for any deficiency.To make a long story short we have received a 1099a and 1099c for both loans with box 5 checked “yes”. Called WF to have them corrected and the only 1099c we received was one for $10,000 more on the HELOC. Don’t know how they came up with this amount as $0 shows in interest added. We are now working with an attorney and a CPA on figuring this out. Should hear more this week. Waiting for CA to conform with FED law which would be the easy way out for us but not the correct one as we should be covered by the One Action Rule (CA) and purchase money law in CA. Not very happy with bank right now.
Looks like the Gov is going to veto SBx8 32. According to this article though they are working on alternatives:
California tax relief for forgiven mortgage debt delayed by politics
Posted March 16th, 2010 by California Home Loan
Sacramento-area residents are almost certain to get state tax relief for 2009 forgiven mortgage debt – eventually. First, allow for politics. On Monday, Gov. Arnold Schwarzenegger signaled his intent to veto a wide-ranging bill that – among other provisions – bans the state from taxing debt forgiven in short sales
and loan modifications. But the governor’s spokesman said Schwarzenegger is “absolutely, 100 percent” committed to ensuring that Californians who escaped one harrowing financial
encounter with lenders don’t have another with the state this year. A majority of lawmakers have repeatedly said the same. “We’re looking to get this done with another bill,” said Schwarzenegger spokesman Aaron McLear on Monday. McLear said the governor is looking at AB 1779 by Assemblyman Roger Niello, R-Fair Oaks, and SB X6 14 by Sen. Ronald Calderon, D-Montebello. Both would prevent the state from labeling forgiven mortgage debt as extra new income and taxing it. The federal government has banned such taxes through 2012. California lawmakers and the governor banned them in 2007 and 2008, but haven’t reached agreement yet for 2009. Niello’s proposal extends protections through 2010; Calderon’s through 2013. The governor’s veto threat stems from a dispute with the Democratic-controlled Legislature over SB X8 32, a bill passed by both houses in recent days. McLear said Schwarzenegger will likely veto it over a business tax issue unrelated to the forgiven mortgage debt issue. The governor opposes a clause that penalizes the state’s largest businesses for seeking some tax refunds. Businesses, backed by such groups as the California Chamber of Commerce, say they sometimes overpay taxes to avoid penalties for underpaying. But some businesses routinely fish for refunds whether or not they’re fairly owed one, said Democrats, pointing to similar prevention measures by the federal government. “This anti-fraud provision was adopted by the Bush administration in 2007,” Alicia Trost, spokeswoman for Senate President Pro Tem Darrell Steinberg, D-Sacramento, said in a statement Monday. The forgiven mortgage debt and business refund provisions are among dozens in a bill that aligns many of the state’s tax codes with those of the federal government.
Read more
http://www.vcstar.com/news/2010/mar/16/governor-legislature-at-mini-budget-impasse/
I was just reading through this blog in pursuit of gathering updates on this new law. I modified my GMAC loan in February 2009. I just had my taxes done by a CPA and as of right now, I owe $0 to the Fed and $17,000 to the state. I’m following the bills closely in hopes that the Mortgage Forgiveness Debt Relief Act will be extended for 2009. From what I understand, the recourse vs. non-recourse loan has no bearing on whether you will be taxed on this amount by CA. The major issue is getting the bill signed ASAP. I’m going to file for an extension if it does not get passed by April 15th in hopes that it will get passed before year-end. Nice to find this link where people are sharing updates!
vanessa
i don’t know who told you that recourse or non-recourse doesn’t matter but they are wrong wrong wrong.
non-recourse loans are secured loans and the borrow is not liable for the debt. they also do not result in cancellation of debt income.
i got my 10990c. box 5 was checked yes. (yes = recourse.
i got my bank to correct it to no (no = nonrecourse)
i filed my taxes with the corrected 1099-C and i owe nothing to fed or state.
sorry guys. i realized that i messed up.
i did get my bank to correct my 1099-c though BUT turbo tax does not even ask about box 5 so I now can’t even use turbo tax.
i started using taxact.com and it DOES include the question about box 5 and as soon as i check that my box 5 shows NO, the system wiped out all cancelled debt money.
HOWEVER…the amounts now due to state went from $163 on TT to over $500 on taxact. and my my fed refund went from $813 on TT to only $83 on taxact.
so….i don’t know what to do at this point!
Seems like there is no a legal or common definition about the check box #5 in 1099-C. I just got the following reply from GMAC:
“Recourse means a lender must repurchase a loan from an investor in the case of default or other defect. Box 5 on the 1099-C has nothing to do with this sense of recourse. Non-recourse in the sense you are referring to is whether you are personally liable for the debt. You will need to speak with your tax advisor regarding whether or not you are personally liable. No changes to the 1099-C are needed.” Now I am not sure what to reply back.
Hi Coletta, by chance do you know or have a count of how many people had the 1099-C corrected or how many Banks/Lenders have reissue it? At least GMAC is not doing.. Thanks.
Mig
I think I may be the only one.
Sorry.
My bank was a local bank that was a member of the California Bankers Association….so I think that is why I was able to get it changed.
The larger banks are not working with people at all.
You need to report them to the OTC and/or the OCC.
I thought it is Wells Fargo your bank. If not may I know it? Thanks again.
Santa Barbara Bank & Trust
Coletta,
I did the same thing you did (re-entered my 1099-C), selected the same options as you, but Turbo Tax then asked me for the cancelled amount and I still owe $14,000 for CA State taxes…interesting.
I hope you are off the hook! That would be fantastic!
i redid my taxes today after my bank FINALLY sent me corrected form 1099-c.
BUT…..when i did turbo tax last time I thought that I had to manually pull in form 1099-C. When I did that, turbo tax then had me fill in the cancelled debt amounts and that is when my state tax went sky high.
Today, I just followed all the turbo tax prompts, instead of adding forms on my own, and I owe NOTHING.
Turbo tax asked if you have any other 1099 forms. I checked yes. I then selected the 1099-C. It then asks how many I got. Then it asks if it was on my MAIN home. I checked yes. It moved onto the next section.
No taxes due. No asking to enter the cancelled amount.
I think we may be all freaking out for nothing. I obviously did something wrong that last time by manually pulling in forms.
Did you do federal tax or CA? What is the correction to your 1099 C?
Good morning to all.
I read this online this morning.
http://cbs13.com/local/california.home.tax.2.1555423.html
I finally got somewhere with my 2 months of persistance!
The California Bankers Association was able to help me. They contacted the VP of Pacific Capitol Bank (the same man that I sent multiple letters to) and I WILL BE getting corrected 1099-C forms. This is from the mouth of the VP.
The bank is to call me today and I am to call Jason Lane at the California Bankers Assocation on Monday if I have not heard from the bank.
The California Bankers Association is a trade association that banks pay to be a part of. (Actual banks, not financial lenders such as GMAC, ING, etc.) Because my mortgage was from an actual bank, I was able to get this association to look into this matter for me.
If your mortage was through a Non-depository institution, the association will not be able to help, because they do not regulate these types of lenders. You will need to contact the California Department of Corporations and find out WHO regualtes non-depository institutions. I called the number that I have for them, but they are closed on Friday. 1-213-576-7662.
I will not fully beleive that my situation is resolved until I am holding the corrected 1099-C in my hand but at least now I have some hope.
You HAVE TO BE PERSISTANT.
I have been on the phone and or internet since January and I have mailed out letters to everyone I could think of.
PUSH PUSH PUSH until people are sick of you.
We will ALL get this resolved!
good for you..but the main topic for this site is for getting the law passed…finding alternatives will only weaken the resolve for the bills being submitted for passing…
true!
but if the banks would send out CORRECT forms to begin with, then thousands of people, who had non-recourse loans, would not have to sit around and wait for a bill to pass.
woo hoo…i will pass this news along!
thanks to everyone on here is kicking butt at getting the word out and staying informed!
we shall prevail!
Coletta,
I would like to thank you for all your hard work. The links and constant follow-ups are very valuable information to all of us.
Nerses
thanks to you too….we all need to stay on top of this!
http://www.vcstar.com/news/2010/feb/28/governor-to-decide-tax-fix-for-short-sales-may/
I checked out that link mentioned above and it appeared to be down. Did anyone else have that issue or is it just me?
Terrance…the link is working for me on the news story.
http://www.kcra.com/money/22538845/detail.html
Just spoke to Collin Gornell at the Senate Revenue & Taxation Committee. 1-916-651-4119. He gave me an update on this issue in language that the basic person can understand.
This bill is similar to many out there but it is the farthest along in the process.
It it a part of a large bill and within that bill is one issue that caused the veto in the past. It has to do with Baseless Refund Claims. SOOooooooooo that could also cause the bill to get vetoed this time.
If all goes well…this bill should be on the govenors desk within 2 weeks. Then we just wait and see what he does with it.
NOW..let me add this little tidbit of info…in my conversation with Collin I brought up the issue, that most of us are having, that the banks are sending us out incorrect form 1099-C. He cut me off before I even finished my sentence and said that non-recourse loans shouldn’t even be getting a form 1099-C. I am now waiting to see if there is something that he can provide that we can then show to our banks to MAKE THEM correct and/or remove these FALSE forms.
Hi,in our case, we didn’t end up in foreclosure, but we had loan modification and lowered the interest rate, and all of the changes are made based on the new and lowered property value. Of course, the house is our principal home, not a investment. And in the 1099-C we have the box 5 in matter as Yes marked. Should this case also be Non Recourse Loan and have it marked as No? Thanks in advance.
Repost. I would appreciate if there is anyone would know if the loan canceled due to modification of principal and interest rate is recourse loan or not. Thanks Again.
MIG..i asked around and if the original loan was a non-recourse loan, then it is my understanding that the modification should also be a non-recourse.
Thanks Coletta, I asked GMAC, and the lady will answer me back around next monday and confirm either if the canceled debt was Non Recourse or not.
my fingers are crossed for you!
Hi Coletta, I just found out from GMAC that the loan before and after Loan Modification are Non Recourse. Now, I need to tell GMAC that either 1099-C shouldn’t have been sent out or have the box 5 as No. By chance is there any link from IRS that mention such that in case of Non Recourse Loan what supposed to be done? And secondly is there any link for FTB or CA saying that case of Non Recourse Loan the forgiven amount is non taxable income? Thanks Again. – Miguel
I did further analysis of the IRS Publication 4681 and it seems correct that GMAC has issueed 1099-C with check box # as Yes for the Loan Modification situation. This is because as follow: IRS PUB 4681 define that “If you are not personally liable for the debt, you do not have ordinary income from the cancellation of debt unless the lender offers a discount for the early payment of the debt or agrees to a loan modification that results in the reduction of the principal balance of the debt… ” Later in the section “Discounts and loan modifications” describes that “If a lender offers to discount (reduce) the principal balance of a loan if the loan is paid off early, or agrees to a loan modification (a “workout”) that includes a reduction in the principal balance of a loan, the amount of the discount or the amount of principal reduction is canceled debt whether or not you are personally liable for the debt.The amount of the canceled debt must be included in income unless certain exceptions or exclusions apply.” Therefore as a result of this definitions, the only solution for my situation is the comformity of CA State to the The Mortgage Forgiveness Debt Relief Act. And the loan being Non Recourse or Recours becomes secondary subject in the case of Loan Modification. Since I am not tax expert, I would appreciate if anybody can confirm and that would be great. Thanks.
Mig
The bank is correct in sending out the 1099-C.
The issue is box 5.
Box 5 asks if the borrower is liable for the debt.
This is in reference to the canceled debt, not the actual home loan.
On a non-recourse loan, box 5 would be checked no. NO because YOU the borrow are not liable for the debt. (the cancelation debt)
Hi Coletta, I am in contact with GMAC and they are asking if there is any specific tax legislation doc that state that the check box # should be No. Their position is that it is correctly done. By any chance do you know how or from where I can get it? Thanks
Hi Mig
I have searched for actual written info specific to box 5 and can not find any. I started my battle with my bank after I spoke to the IRS. They are the ones that told me that box 5 should be checked no on a non-recourse loan, and that it was up to me to get the bank to correct it.
Box 5 is what is causing the tax problem and GMAC and ALL OTHER banks know this and I am disgusted that they are playing dumb on the issue.
My bank also told me that box 5 should be no and they would correct it.
However, NOW they are saying that since all laws in regards to this are geared toward foreclosures and do not mention short sales, that they may not correct my 1099-C after all.
But THAT is a whole other issue.
Hi again, and Thanks for the prompt response. Also GMAC has asked me if there is any California legislation document that would say that if it Non Recourse Loan, the canceled debt is not taxable income.
As you said, all this is frustrated process… Thanks again.
Mig
I redid my taxes today after my bank FINALLY sent me corrected form 1099-c.
BUT…..when i did turbo tax last time I thought that I had to manually pull in form 1099-C. When I did that, turbo tax then had me fill in the cancelled debt amounts and that is when my state tax went sky high.
Today, I just followed all the turbo tax prompts, instead of adding forms on my own, and I owe NOTHING.
Turbo tax asked if you have any other 1099 forms. I checked yes. I then selected the 1099-C. It then asks how many I got. Then it asks if it was on my MAIN home. I checked yes. It moved onto the next section.
No taxes due. No asking to enter the cancelled amount.
I think we may be all freaking out for nothing. I obviously did something wrong that last time by manually pulling in forms.
Did further reading of IRS Pub 4681 on exclusion of canceled debt as ordinary income that stays as follow “”… You can exclude canceled debt from income if it is qualified principal residence indebtedness. Qualified principal residence indebtedness is any debt incurred in acquiring, constructing, or substantially improving your principal residence and which is secured by your principal residence. Qualified principal residence indebtedness also includes any debt secured by your principal residence resulting from the refinancing of debt incurred to acquire, construct, or substantially improve your principal residence but only to the extent the amount of debt does not exceed the amount of the refinanced debt. ”
Based on this, I think the 1099-C shouldn’t have been issued since despite of the canceled debt is a ordinary income, it becomes excluded of being treated as such resulting non ordinary income with no need to issue 1099-C. Well this is my interpretation that I have told to GMAC. Let’s see what happens.
Mig
Your bank is full of idiots OR people pretending to be idiots!
Are they in the state of CA?
Here are multiple links that state that non-recourse loans do NOT result in Cancellation of Debt Income:
From: http://www.businessfinance.com/nonrecourse-debt.htm
Nonrecourse debt – A secured loan with no personal liability.
A nonrecourse debt is secured by some form of collateral, under which the borrower has no personal liability. If the loan defaults, then the lender only claims the collateral. The borrower’s liability is limited to the collateral put down for the loan. If the collateral is less than the amount still owed when the loan defaults, it is a loss for the lender.
From: http://www.irs.gov/newsroom/article/0,,id=174034,00.html
Non-recourse loans: A non-recourse loan is a loan for which the lenders only remedy in case of default is to repossess the property being financed or used as collateral. That is, the lender cannot pursue you personally in case of default. Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income.
Taxable cancellation of debt income. (Note: As stated above, cancellation of debt income is not taxable in the case of non-recourse loans.)
Step 1 – Figuring Cancellation of Debt Income. (Note: for nonrecourse loans, skip this section. You have no income from cancellation of debt.)
From: http://accountant.intuit.com/practice_resources/articles/tax/article.aspx?file=tmdd_1099C-2009
If a client is not personally liable for the debt (nonrecourse), the cancellation of debt does not result in COD income unless one of the following conditions exists:
1. The lender offers a discount for the early payment of the debt [Rev. Rul. 82-202].
2. The lender agrees to a loan modification that results in the reduction of the principal balance of the debt [Rev. Rul. 91-31]
From: http://www.ftb.ca.gov/professionals/taxnews/2007/1007/1007_3.shtml
In California, purchase money mortgages, which are mortgages where the borrowed funds are used to purchase the house, are generally treated as non-recourse debt.
From Timmer Herdt, Sacramento reporter for the Ventura County Star:
Just talked with Sen. Wolk. She said her bill got out of Assembly Appropriations today and is likely to be taken up by the full Assembly on Monday. Because of the other conformity issues, however, there is heavy opposition from some business groups, incl. Calif Manufacturers and Technology Assn. It’s li…kely this will become part of the umbrella discussions on midyear budget actions, which probably means the governor’s office needs to hear from people such as yourself.
http://www.leginfo.ca.gov/pub/09-10/bill/sen/sb_0001-0050/sbx8_32_cfa_20100224_091411_asm_comm.html
From facebook group The Peoples Page 1099-C:
Update on SBX8 32 from Senator Wolk’s office…. it’s passed committee, and it was sent to the Assemby where it was held at the desk and then referred to the Committee on Revenue and Taxation On February 22. Apparently this is a “good” thing. If you have questions for the Com on Rev and Tax you can call 916-651-4119. …Good luck everyone, this one seems like it’s the only alternative for me since we just refinanced and did not short sale / forclose.
Jason
I haven’t started RE-doing my taxes yet, but the insolvency worksheet says to keep for YOUR records. I see nothing to include with the actual taxes. I am very interested to see if there are additional papers to file with IRS or State though. I am going to wait a bit longer to actually fully prepare & file my taxes to see what new things may happen in regards to all of this stuff.
Not sure if we are more likely to get audited or not. My income vs. others is low and they wouldn’t get any money outta me if they did audit me. But who knows at this point.
We were insolvent by a similar amount. Dumb question: if you do claim insolvency to avoid the phantom COD income, do you have to file any additional forms with your federal tax return to prove insolvency? Also, are you more likely to be audited by the IRS?
Well, if I figured the worksheet correctly, we are insolvent by over $108,000.
Thank god!
There are so many now…I don’t know which one is the most current:
There is a new bill AB1779 (Introduced by CA Assembly Member Niello, February 9, 2010) which will be in assembly on March 12. All home owners who lost their property must contact their local assembly member and request them to support this bill. The objective of the bill is to extend the tax forgiveness in State of CA till Jan 01, 2013. If the bill fails thousands of home owners who lost their property in 2009 will end up paying tax to CA FTB for their cancellation of debt 1099C sent by their mortgage companies.
Website to find the local assembly member:
Your Legislature (http://www.leginfo.ca.gov/yourleg.html)
The pdf version of the BILL #: AB1779 can be found at the below location
http://www.leginfo.ca.gov/pub/09-10/bill/asm/ab_1751-1800/ab_1779_bill_20100209_introduced.pdf
Look Guys, it’s not that I am for taxing, I am simply saying that “insolvency” somewhat justifies it. I am hoping that “insolvency” will save me from my CA tax too.
Coletta, if you brother lost his job in, for example 2000, he would have paid not only state but also federal tax. So we should look at 2007 and 2008 more of an exception than 2009.
Also, we should look on the other side of the story: if your brother made money on his Chicago house for up to 250K (for single and 500K for married) then he did not have to pay taxes on his gain.
newest info:
http://dist05.casen.govoffice.com/index.asp?Type=B_PR&SEC={E9650A38-1258-46F3-AE35-DF862FD66D02}&DE={C0E42705-F2F6-464B-9F57-3A595587E110}
this is my last comment on this…sorry to ramble…
you also need to realize that investors are already paying taxes on the “investment” homes. Any rental money that they got was taxed as income and taxes were paid on that.
So now those people are being told to pay double taxes; taxes on the income, they really did get, from the renter, and taxes on income, they didn’t get, when it was sold in a short sale.
Listen, I understand that some people took full advantage of the system and bought half a million dollar homes when they only made $35,000 a year or decided to become house flippers and then walked away when the market went sour….but everyone of those people, there are people like all of us on this site that lost our homes because of a job loss, or other financial issue…to me it does not matter.
I feel that no matter how, what, why, or when it happened…to expect people to pay INCOME tax on money that they did not earn is just wrong and in my opinion…ILLEGAL!
If it is allowed to happen it sends a message to the American people that we can taxed at anytime for anything…whether we really owe the money or not!
I like the point that you make jason….2007 & 2008 NO ONE had to pay taxes….now people do! THAT is just wrong!
Here is a scenario for you:
My brother lost TWO homes. He owned a small condo in San Diego. It was his personal residence for several years and he had a great job. That job transferred him to Chicago. He rented out his San Deigo condo, moved to Chicago and rented for awhile. Ended up deciding to buy a house there because he thought he would be in Chicago for 5 years or more. His finances were in great shape. ONE YEAR after being transferred to Chicago (2008) the company laid him off….and his renter in San Diego bailed on him. He looked for work, he tried to get a new renter for his condo. Both things failed.
By the end of 2008 his savings was drained and he still had no new job. First he lost his Chicago home and when he tried to work out an agreement with the bank to somehow keep his San Diego condo they told him no. He lost everything because he lost his job. LUCKILY, it was in 2008 so he doesn’t owe any taxes on all of this…BUT had it happened in 2009 he would to California.
He didn’t go into either purchase as an “investor”. He was at a good place in his life and then it all went to hell.
My point is, that there so many scenarios that could have happened to cause people to lose their homes…..if your loans are soley for the purchase of the home and you DID NOT take out cash and go all willy nilly buying shit…then you should not have to pay taxes on the loss of the house.
INCOME taxes should not have to be paid on income you DID NOT earn.
The second paragraph was meant to be addressed to Nerses
Coletta,
I don’t want to defend the FTB or IRS, but one exception would be people who bought their CA homes when prices were low, took equity out and spent it all during the property boom, and offloaded their homes during the crash. Effectively they did earn income from the homes since they never had to repay the equity they took out. The situation is totally different for people who kept equity in their homes and refinanced to get a better rate – they also had recourse debt and shouldn’t be penalized like the first group.
Jason,
One counter-argument is that CA was quite willing to follow the federal mortgage debt relief act in 2007 and 2008. If they were willing to do that for those two years, why should people be penalized in 2009 (and beyond) because of the state’s current financial woes?
Exactly my point Jason.
(a) “… less sympathy for those who walked away from homes but had enough assets to cover their upside-down positions” – so only pay CA tax.
(b) “… no sympathy for speculators who walked away from investment homes” – so pay CA and federal tax,
(c)And for everyone else (the ones who were insolvent) – do not pay any tax.
Almost fair don’t you think?
I was just reading over all of these recent posts and I have to say that we really need to “rethink” the attitude toward this and how some of you feel in regards to investment properties.
To me it should not matter if the home that was lost was a personal residence OR an investment property.
AND the reason I think that is because UNDER NO CIRCUMSTANCES should someone be required to pay INCOME taxes on income THEY NEVER GOT.
Think about that!
That is like saying that it is ok for people to get taxed just because the state wants to tax them.
Would you allow the state to charge you sales tax for something you never bought? No, you wouldn’t.
People bought homes, some got bad loans, some had ok loans but lost a job, some people simply got in way over their heads…for whatever reason… but no matter how or why IT happened…they lost a home…they DID NOT make any income on that loss…so to make them pay taxes on money they DID NOT earn…is wrong no matter how you slice it!
i am confused as heck by the insolvency thing….our bank fought with us on even allowing us to do a short sale because THEY thought we had enough money to keep the place.
We did not feel that we did…because if we had kept the conod we would have NOTHING left over at the end of the month after we paid all of our bills.
I lost my job and my income went from $18 an hour to unemployment which equaled $8.50 an hour. So with that drop in my income we could no longer afford the condo.
Does insolvency allow you to include all of your monthly expenses that you had at the time? Food, gas, utilities, insurance, etc?